06 October 2008

Credit Default Swaps! The trillion dollar shell game! They are secret, of unknown magnitude, and do not require any reserves to back them up! Totally unregulated because, we were told, because the huge financial institutions that would swap them and sell them and make huge profits off of them had brilliant people who wouldn't let anything bad happen.

These insane instruments allow many people, not directly involved, to buy and sell insurance all riding on whether or not some huge financial giant will default. It took a trillion dollars in liabilities and had them insured for nearly 60 trillion dollars. So when the first domino (default) happened, when a money market broke the buck, trillions came due and nobody could pay up and the dominoes all fell.

Now one of the engineers of this situation, Paulson, snookers us into an emergency bailout of $700 billion to help shield some of these speculators from the bitter fruit of their greed! And our idiot representatives in Congress with a few exceptions voted for this shell game bail out WHICH WILL NOT WORK!

3 comments:

Do you have a Private mortgage insurance (PMI) policy? If you do have one your PMI insurer passes their risk to others by bundling 100 policies together and selling them as a credit default swaps (CDS). They do this in order to protect themselves by large payment to mortgage providers such as insurers in the event your home is repossessed. In the mortgage industry this has been the case for decades. If you bought a PMI to protect your lender then you are building the CDS market. To avoid this put at least 20% down on your home or pay what it takes now to get rid of the PMI policy. http://nomedals.blogspot.com

The problems with CDSs that Avatar did not address are 1) they are unregulated; 2) they did not require any reserves to assure payments; 3) they could be bought by speculators who did not have a dog in the fight--i.e., if I had a million dollars and wanted to buy a CDS to speculate on AIG or Goldman Sachs, or Lehman Brothers defaulting, I could. So when a trillion dollars went into default there were CDS amounting to nearly 6o trillion dollars; and 4) these were bought and sold in secret so no one could judge what the magnitudes of risk were! Secrecy, i.e., lack of transparency, and speculatory buying on selling (i.e., betting CDS) which were not a useful or necessary part of the process Avatar describes, brought the house of specualtory cards down.